When FCRA Meets Insolvency: Can Foreign-Funded Assets Form Part Of An Insolvency Estate Under The IBC?

The Insolvency and Bankruptcy Code, 2016 (“IBC”) seeks to facilitate the resolution of insolvency, maximise the value of a corporate debtor’s assets and balance the interests of stakeholders. A central aspect of this framework is the identification and preservation of assets available for resolution or liquidation. However, the position becomes more complex when a corporate debtor holds assets acquired using foreign contributions regulated under the Foreign Contribution (Regulation) Act, 2010 (“FCRA”).

The FCRA establishes a regulatory framework governing the acceptance and utilisation of foreign contributions by eligible persons and organisations. It also contains specific provisions concerning the management and disposal of foreign contributions and assets created from them in certain circumstances.

This creates an important question at the intersection of the two statutes: Can assets acquired using foreign contributions form part of the insolvency estate of a corporate debtor, and, if so, can such assets be realised and their proceeds distributed to creditors?

The question is relevant to entities receiving foreign contributions, including eligible non-profit organisations and Section 8 companies, as well as insolvency professionals, creditors and foreign donors.

• What forms part of the liquidation estate?

Under Section 33 of the IBC, a liquidation order may be passed in the circumstances prescribed under the Code. The liquidator is then responsible for taking custody and control of the corporate debtor’s assets, forming the liquidation estate, realising its assets and distributing the proceeds in accordance with the IBC.

Section 35 sets out the powers and duties of the liquidator, while Section 36 governs the constitution of the liquidation estate. Section 53 prescribes the order of priority for distributing liquidation proceeds.

Where a corporate debtor holds assets acquired using foreign contributions, the liquidator must determine whether those assets are available for inclusion in the liquidation estate.

In case of FCRA assets, Section 36(4) of IBC, 2016 and Section 15 of the FCRA, 2010 should be read together. While IBC lists the assets that shall not be included in the liquidation estate and cannot be touched by the liquidator, FCRA on the other hand, explicitly states that upon cancellation or surrender, the foreign contribution and assets shall vest in such authority as may be prescribed, with Section 15(3) requiring the authority to return the contribution and assets if the person is subsequently re-registered under the Act. Because FCRA assets statutorily vest in the government authority upon cancellation or surrender, it can be argued, by a combined reading of Section 15 of the FCRA and Section 36(4) of the IBC, that these assets fall outside the liquidator's estate, since a liquidator cannot administer assets it has no statutory right to control. This position has not, to date, been tested in reported case law applying Section 36(4) specifically to FCRA assets.

• Operational Scenarios for FCRA Asset Treatment

The liquidator must isolate the FCRA asset pool (including unutilized foreign funds, lands, buildings, or

equipment purchased using foreign contributions) and only proceed with other assets that can be included in the liquidation estate.

For FCRA assets, there are two scenarios to be contemplated as follows: Scenario 1: Liquidation with an Active FCRA Registration.

1. Vesting Precedes Surrender (Section 14A): Surrender under Section 14A is only permitted once the Central Government is satisfied, after inquiry, that the entity has not contravened the FCRA and that the foreign contribution and assets have already vested in the prescribed authority under Section 15(1). The Chief Functionary/Directors use their credentials on the MHA portal to submit Form FC-7 together with a complete inventory of foreign assets once that vesting has occurred.
2. Asset Memorandum Isolation (IBC Reg. 34): The liquidator lists the FCRA assets in a distinct, isolated annexure of the asset memorandum, explicitly identifying them as assets excluded from realisation in the liquidation.
3. Physical Takeover & Discharge: Following the MHA's inquiry, an order is issued directing the company to hand over physical and financial control of the asset pool to the designated Prescribed Authority. The authority issues a receipt of takeover.
4. Final NCLT Dissolution: The liquidator submits the official handover receipts and MHA clearance papers to the NCLT. The Tribunal then issues the final order to dissolve the Section 8 corporate entity under Section 59 of the IBC.

Scenario 2: The Company’s FCRA license is cancelled during or before the liquidation process:

1. Vesting of the Unutilised FCRA Bank Balance: The moment the MHA issues a cancellation order under Section 14, Rule 15 of the FCR Rules, 2011 is triggered.
   • The unutilised balance in the designated FCRA bank account vests with the banking authority concerned pending further direction from the Central Government.
   • No transaction can be authorized by the Directors or a Liquidator without direct permission from the Central Government.
2. Sovereign Takeover by the Prescribed Authority: Under Section 15(1) of the FCRA, the MHA directs vesting of such assets with the Additional Chief Secretary or Principal Secretary of the concerned State or Union Territory where the assets are physically located. If the assets include public-facing projects (like a school or hospital), the Prescribed Authority appoints a government administrator to keep them running.

• Vesting and Disposal: The Proposed FCRA Amendment 2026 Bill

The 2026 Bill proposes to omit the existing Section 15 and introduce Chapter IIIA. Under proposed Section 16A, foreign contributions and assets created from them would provisionally vest in a Designated Authority upon cancellation, surrender or cessation of the registration certificate.

The proposed framework expressly addresses cessation, including cases involving failure to apply for renewal, refusal of renewal or expiry without obtaining renewal. This is significant because the proposed vesting mechanism would not be limited to the cancellation or surrender of a certificate.

The Designated Authority would be an officer or authority notified by the Central Government, as contemplated by the proposed definition in Section 2(1)(fa). The Bill does not itself name a specific officer. The proposed Designated Authority should not be confused with the prescribed authority under the existing framework: the Bill proposes a new statutory structure with more expressly defined powers.

Under proposed Section 16A, the initial vesting would be provisional. However, since the company would be under liquidation, assets would stand permanently vested in the Designated Authority.

The Bill also expressly addresses assets created or acquired partly from foreign contributions and partly from other sources. Under the proposed Section 16A mechanism, such assets may vest in their entirety, while the distinct or ascertainable portion attributable to other sources may be returned in accordance with the prescribed procedure. This is a material proposed change because it directly addresses mixed-funded assets rather than leaving their treatment to the more limited existing framework.

• Permanent vesting and disposal: What happens to the assets?

Under proposed Section 16A(6), assets permanently vested in the Designated Authority would be applied for public purposes. The authority could transfer them to a Ministry, Department, authority or agency of the Central or State Government, or to a local authority. Alternatively, it could dispose of them by sale or another appropriate process. The proceeds of disposal, along with unutilised foreign contribution, would be credited to the Consolidated Fund of India.

The proposed Section 16D creates a statutory shield around any provisionally or permanently vested property. It explicitly prohibits the property from being:

• Attached or seized.
• Sold in execution of a decree by a civil court.
• Liquidated or distributed by an order of a Tribunal (such as the NCLT) or any other authority, except strictly in accordance with the provisions of the FCRA.

This creates a direct statutory check on the NCLT's powers. Even if a liquidator attempts to invoke the overriding powers of Section 238 of the IBC, the explicit asset insulation under Section 16D indicates that the asset cannot be pulled back into the general liquidation estate. This insulation is not absolute: the proposed framework and accompanying government materials describe a right of revision and further appeal against an order of the Designated Authority, which qualifies the extent to which the vesting mechanism forecloses judicial recourse.

Further, under the proposed Section 16A(6), once the asset permanently vests because the company is dissolving , the Designated Authority holds the absolute right to either transfer the physical property to a government agency or dispose of it via an independent sale process. Crucially, the proceeds of this sale, along with any unutilized foreign bank balances, will be credited directly to the Consolidated Fund of India. They are entirely diverted away from the liquidator's bank account and cannot be used to pay off local vendors, banks, or operational creditors under Section 53 of the IBC.

As of October 2026, these provisions remain a legislative proposal under review by the Joint Parliamentary Committee and do not currently have the force of enacted law.

• Conclusion

While the IBC provides for the realisation and distribution of a corporate debtor’s assets among its creditors, the FCRA establishes a distinct statutory framework governing foreign contributions and assets created from such contributions. Accordingly, the treatment of FCRA assets in insolvency proceedings must be considered in light of the statutory restrictions governing such assets. FCRA assets do not form part of the liquidation estate available for realisation and distribution among creditors under the IBC.

The proposed amendments to the FCRA further address the treatment of foreign-funded assets by providing for their vesting and protection upon specified events, including the cessation of registration. These provisions reinforce the importance of recognising the distinct statutory treatment of FCRA assets in the context of insolvency and liquidation proceedings.

Key Takeaways

• For entities receiving foreign contributions: The implications of FCRA registration and the treatment of foreign-funded assets in the event of insolvency or liquidation should be considered as part of their compliance framework.
• For insolvency professionals and liquidators: FCRA assets should be identified and dealt with in accordance with the applicable statutory framework and should not be treated as assets available for distribution among creditors under the IBC.
• For creditors and other stakeholders: The presence of foreign-funded assets within a corporate debtor’s asset base does not make them available for distribution in liquidation under the IBC.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.